New Mortgage Rule Would Have Unintended Consequences

The housing market is still weak and federal regulators are considering a regulation that could make matters even worse, says David John, a senior research fellow at the Heritage Foundation.

Known as the Qualified Residential Mortgage (QRM) rule, the draft rule could have the effect of requiring many home buyers to have at least a 20 percent down payment in order to qualify for a best interest rate mortgage. The QRM is part of a risk-sharing provision in the Dodd-Frank financial regulation bill that was supposed to require lenders to do a better job of underwriting mortgages. In addition to making it harder for qualified consumers to obtain loans:

The proposed regulation would preserve the roles of Fannie Mae and Freddie Mac, the government-sponsored finance agencies whose collapse has already cost taxpayers in excess of $150 billion.

It would also further concentrate mortgage lending in the largest financial institutions.

As the mortgage disaster illustrated, better underwriting is an absolutely essential step toward both housing recovery and a restoration of faith in mortgage-backed securities.

However, it is very unlikely that the Dodd-Frank provision would have the effect that supporters expect. While well-intentioned, the draft QRM regulations would have serious negative consequences for individual borrowers and for efforts to reform the housing market by eliminating Fannie Mae and Freddie Mac, says John.